Updates To The S13O/U Tax Incentive Schemes
Introduction
On 5 July 2023, the Monetary Authority of Singapore (“MAS”) announced changes to the requirements for the S13O and S13U tax incentive schemes for single family offices (“SFOs”). Notable changes to the qualifying criteria for the schemes include conditions for the fund’s assets under management, hiring of investment professionals, minimum business spending requirement and an expanded list of options for the minimum capital deployment requirement. Many high-net-worth individuals are increasingly choosing Singapore as their preferred base for setting up their SFOs, with 1,100 SFOs set up and awarded tax incentives by MAS by end of 2022, up from 700 in 2021.[1] As such, the changes are aimed at encouraging SFOs to (i) participate in blended finance structures and climate-related projects, (ii) invest in local companies, (iii) contribute to job creation and (iv) conduct philanthropic activities.1
Key Changes – Old vs Revised Conditions
The changes would only affect new applications (i.e. Annex A[2] submissions) to the MAS from 5 July 2023, and would not affect applications that have been submitted prior to 5 July 2023 which are still being processed by the MAS.
| KEY POINTS | BEFORE 5 JULY 2023 | AFTER 5 JULY 2023 |
| Minimum Assets-Under-Management (“AUM”) | 13O: S$10m at point of application, with a 2-year grace period to grow the AUM to S$20m. | 13O: S$20m in Designated Investments[3] at the point of application (i.e. submission to the MAS on the MASNET platform) and throughout the incentive period. |
| 13U: S$50m at the point of application. | 13U: S$50m in Designated Investments3 at the point of application (i.e. submission to the MAS on the MASNET platform) and throughout the incentive period. | |
| Minimum Investment Professionals (“IPs”) | 13O: At least 2 IPs at the point of application, with a 1-year grace period to employ the second IP. Both IPs can be family members. | 13O: At least 2 IPs employed at the point of application (CVs must be included in the Annex A submission) and throughout the incentive period, with at least 1 IP who is not a family member. |
| 13U: At least 3 IPs, one of whom must be a non-family member, with a 1-year grace period to employ the non-family member. | 13U: At least 3 IPs employed at the point of application (CVs must be included in the Annex A submission) and throughout the incentive period, with at least 1 IP who is not a family member. | |
| · IPs are required to have the relevant academic qualifications (CMFAS, CFA or finance degrees) or formal work experience (e.g. investment management or mergers and acquisitions if the fund has a focus on PE/VC/direct investments).
· Wealth creators without relevant academic qualifications and formal work experience but possess ample experience managing their personal funds may qualify as IPs. · All IPs (except for the wealth creator who owns/runs the family business) must have a minimum salary of S$3,500 per month, be engaged substantially in the IP role and cannot hold executive roles outside of their IP role. · IPs must be Singapore tax residents in each qualifying year of assessment. |
||
| Minimum and Tiered Spending Requirement | 13O: At least S$200,000 in total business spending[4] in each basis period relating to any year of assessment. | 13O/U: Minimum S$200,000 in Local Business Spending[5] across all AUM sizes, subject to the Tiered Spending Requirement*.
|
| 13U: At least S$500,000 in local business spending4 in each basis period relating to any year of assessment. | ||
| Minimum Capital Deployment Requirement (“CDR”) by the end of the first financial year | 13O/U: Fund must invest at least 10% of its AUM or S$10 million (whichever lower) in local investments#.
#Products may include: i) Equities listed on Singapore-licensed exchanges, ii) Qualifying debt securities, iii) Funds distributed by Singapore-licensed/registered fund managers, iv) Private equity investments into non-listed Singapore-incorporated companies with operating business(es) in Singapore |
13O/U: Fund must invest at least 10% of its AUM or S$10 million (whichever lower) in any of the options## by the end of the first full-year Annual Declaration and in each subsequent financial year.
##The options are as follows: i) Equities, REITs, Business Trusts or ETFs listed on MAS-approved exchanges ii) Qualifying Debt Securities iii) Non-listed funds distributed by licensed financial institutions in Singapore iv) Investments into non-listed Singapore-incorporated operating companies with operating and substantive presence in Singapore v) Climate-related investments vi) Blended finance structures with substantial involvement of financial institutions in Singapore
CDR Multiplier – Investments into any of the following will be scaled up by a multiplier for CDR computation.
2x Multiplier: · Equities listed on MAS-approved exchanges · ETFs with primary mandates to invest in Singapore-listed equities on MAS-approved exchanges · Non-listed funds distributed in Singapore with primary mandates to invest in Singapore-listed equities on MAS-approved exchanges · Deeply concessional capital in blended finance structures with substantial involvement of financial institutions in Singapore
1.5x Multiplier: · Concessional capital in blended finance structures with substantial involvement of financial institutions in Singapore |
| *Tiered Spending Requirement | |||
| Spending requirement in each Year of Assessment | AUM < S$50 million | S$50 million ≤ AUM < S$100 million | AUM ≥ S$100 million ≥ S$10 |
| Local Business Spending ≥ S$200,000 | Local Business Spending ≥ S$500,000 | Local Business Spending ≥ S$1 million | |
| Minimum S$200,000 Local Business Spending | Minimum S$200,000 Local Business Spending
+ Balance can be made up of: (i) Eligible donations to local charities; and (ii) Grants[6] to blended finance structures with substantial involvement of financial institutions in Singapore[7] (recognised as 2x spending). |
||
Information as per the MAS
Application Procedure
The application procedure for S13O and S13U tax incentive schemes remain unchanged. Upon the initial Annex A submission, MAS may take 3-4 months to grant preliminary approval. The formal submission that follows thereafter will be processed for another 6-9 months before MAS notifies the applicant of the outcome. Subject to the applicant providing all the required documents on time for submission and any other case-by-case requirements by the MAS, the estimated application timeline is approximately 10-13 months.
Philanthropy Tax Incentive Scheme (“PTIS”)
SFOs are also suitable platforms for wealthy families to give back to society through philanthropic activities. At the Owners Symposium of the Global-Asia Family Office Summit on 29 September 2022, DPM Lawrence Wong said that the government is reviewing the tax incentive schemes to see how family offices can be encouraged to do more philanthropic giving, and to provide support to the local philanthropy ecosystem by channeling contributions through local charities and non-profit entities.[8] This has materialised with the introduction of the PTIS, which was also announced on 5 July 2023. The scheme allows SFOs that have been awarded the S13O or S13U tax incentive to participate as a donor, who will be able to claim 100% tax deduction (capped at 40% of the Approved Qualifying Donor’s statutory income) for overseas donations if they are approved as a Qualifying Donor[9]. There can only be one Approved Qualifying Donor at any point in time, and this can only be changed upon the demise or ineligibility of the original Approved Qualifying Donor. Overseas donations must be made through Qualifying Local Intermediaries (which include selected Registered and Exempt Charities, Charitable Institutions and Not-For Profit Organisations, amongst others), and SFO applicants are required to incur an additional S$200,000 in Local Business Spending5 (on top of the minimum business spending under the S13O and S13U schemes) in the financial year preceding the date of application, as well as employ a Philanthropy Professional at the point of application. If the SFO chooses to outsource the role of the Philanthropy Professional to a third-party service provider specialising in philanthropy advisory services, then the SFO would be required to employ an additional local headcount (engaged in philanthropic activity or fund management) to qualify for the PTIS benefits. Interested SFO applicants can apply for the PTIS from 1 September 2023 onwards.
Conclusion
The revised conditions for the S13O and S13U tax incentive schemes for SFOs demonstrate that the government recognises the importance of SFOs in generating significant economic contributions for Singapore as a global wealth management hub. The 5 July 2023 changes have been alluded to since last year, and having come to fruition recently, they are aimed at encouraging SFOs to deploy their capital more purposefully to benefit Singapore and the region, and increase contributions towards environmental and social causes.1 The PTIS also provides an added incentive for donors to use their Singapore SFOs as a base for philanthropic giving, which the government hopes will become a regular, professional feature of family offices here.1
SMTP’s experience
As a private client firm, SMTP has helped many clients set up SFOs and successfully apply for tax incentives schemes over the years. The firm has years of experience in helping clients meet the requirements to get approval for the S13O or S13U incentive award so that the SFOs can benefit from statutory tax exemptions. Our Immigration and Family Offices department also has a wealth of experience in Employment Pass applications and renewals for investment professionals that are employed by the SFO. Our lawyers work closely with clients and their advisors, adopting a tailored approach to address families’ specific needs and requirements.
Should you or your clients require any assistance or advice, please feel free to contact our Business Development Team to schedule a consultation.
[1] https://www.mas.gov.sg/news/speeches/2023/mas-annual-report-and-mas-sustainability-report-2022-2023
[2] Annex A documents include, amongst others, profile of the family whose assets will be managed by the SFO, source of wealth, details of the SFO, fund vehicle, IPs and individuals in the SFO, intended investment strategy and description of the SFO’s activities.
[3] As defined in the Income Tax (Exemption of Income of Prescribed Persons Arising from Funds Managed by Fund Manager in Singapore) Regulations 2010.
[4] Expenditure related to the operating activities of the fund, which includes, but are not limited to, remuneration, management fees, tax advisory fees, and operating costs.
[5] Expenses paid to local entities which include but are not limited to remuneration, management fees, tax advisory fees, and operating costs. Expenses such as taxes, penalties, or expenses relating to financing activities are excluded.
[6] Contributions with no return of principal and income.
[7] Includes blended finance structures that are substantially arranged, managed, executed or originated in Singapore.
[8] https://www.pmo.gov.sg/Newsroom/DPM-Wong-at-Global-Asia-Family-Office-Summit-Owners-Symposium
[9] A Qualifying Donor can be (a) the SFO of the S13O/U fund, (b) an Ultimate Beneficial Owner of the S13O/U fund, (c) a beneficiary of the S13O/U fund, or (d) a related Family Business.